Strategic inefficiencies and federal redistribution during uncoordinated response to pandemic waves

Optimal policy during an epidemic calls for depressed economic activity to slow down the outbreak. Sometimes, these decisions are left local authorities (e.g. states). This creates externality, as outbreak does not respect states’ boundaries. The externality directly exacerbates Indirectly, it a free-rider problem, because policymakers pass cost of fighting on other states. A standard system distortionary taxes and lump-sum transfers can implement optimal allocation, with higher tax rates required if states behave strategically. strategic transfers, rewarding which depress their economies more than average, improves outcomes by creating race-to-the-bottom type response. In symmetric equilibrium, rate is lower